Pensions and tax efficient investment products Flashcards
What kind of income tax relief does an individual receive from investing in an occupational pension?
The individual gets tax relief by deducting the pension contribution from the income tax computation, which gives them income tax relief.
What kind of tax relief is given to an individual who invests in a personal pension scheme?
Their pension contributions are received net 20% of tax and by extending bands by gross contribution. For example if I contribute £800 to a pension scheme then the pension fund can actually claim £1000, which is a £200 boost free of tax consequences.
The basic and higher rate bands will also be extending by the gross personal pension contribution.
What is the 1st cap on tax relief for pension contributions?
Pension contributions are capped at the higher of £3,600 or relevant earnings (employment income, trade income and income from a furnished holiday let).
What is the second cap on pension tax relief?
We compare an individuals gross pension contribution to their annual allowance (usually £40k), any amount over the annual allowance is then taxed at the individuals marginal tax rate.
The cap only accounts for the amount of the pension contribution where relief was received.
What is adjusted net income for a self employed and employed person?
Self employed: net income
Employed: net income + pension contributions to workplace pensions + all employer pension contributions
What is threshold income?
Net income - gross personal pension contributions
What happens if the pension annual allowance is not used for any years?
The unused pension allowance can be carried forward for up to 3 years on a FIFO basis, provided the individual was a member of the pension scheme in that year.
What are the income tax charges for excess lump sum drawdowns and excess pension income drawdowns?
The excess charge for lumpsum drawdowns is 55% above the lifetime limit (£1,073,100).
The excess charge for pension income drawdowns is 25%.
What are the conditions for the EIS?
Subscribe for cash in new issued ordinary shares.
Investor must not be connected to company i.e. employed by the company or owning more than 30% share capital.
Investor cannot already hold non EIS or SEIS shares in the company.
What is the income tax relief for EIS investment?
30% tax reducer of up to £1,000,000
Claim must be made by the 5th anniversary after the 31st January that the investment was made e.g. tax year 2021 = Jan 2027
Shares must be held for 3 or more years or the income tax relief is withdrawn.
Investor can choose to have all or some of the shares issued in the previous tax year.
What is the CGT relief for investing in an EIS scheme?
if shares held for 3 years then gain is exempt.
If shares sold at a loss then the loss is always allowable.
If shares sold before 3 years then gain taxed as normal.
In the calculation of the loss the cost is reduced by the net EIS relief not withdrawn.
The capital loss may be relieved against general income in the same way as a trading loss.
Dividends received from an EIS company are taxable as normal dividends.
EIS reinvestment relief is a deferral.
What are the conditions for a SEIS scheme?
Subscribe new shares in cash
Investors must not be connected e.g. employee or owning more than 30% share capital
However investor can be a director
What are the SEIS tax reliefs?
50% income tax reducer up to a maximum of £100,00 investment (e.g. £50,000 tax reducer max)
All or part of investment can be treated as if it was done in previous year.
If shares are sold within 3 years then all or part of the relief will be withdrawn.
CGT reliefs: If shares held for 3 years then gain is exempt.
If sold within 3 years then gain will be taxed normally.
If sold at a loss then capital loss will be allowable, however the cost will be reduced by the amount of IT relief not withdrawn.
Capital loss may be relieved against general income like a trading loss.
SEIS reinvestment relief is an exemption.
SEIS dividends are taxed normally.
What are the tax reliefs for a VCT?
30% Income tax reducer up to £200k (Maximum £60k reducer)
IT reducer withdrawn if shares old within 5 years.
Gains on disposals of secondary purchases and new issues are exempt from CGT.
Losses are not allowable. (There is no minimum holding period for this requirement)
Dividends received from VCT’s are tax free.
What order must income tax reducers be offset?
VCT 1ST
EIS 2ND
SEIS 3RD
